Introduction to Investing

Transcription

1 Introduction to Investing Bobbi Brett s Economics Class, San Rafael High School October 22, 2018 Jon Haveman, Ph.D. 1 Outline Introduction to Investing Stock Market Evaluating Investment Alternatives - How to think about the choices. 2 1

2 What is an Investment? The action or process of investing money for profit or material result. A use of money that is intended to turn money you have into more money. 3 Examples of Investments Piggy bank Savings account Stocks Bonds Housing Business startup 4 2

3 What Makes One Investment Different from Another Investment? Two Things Risk Reward 5 Let s Consider a Variety of Investments Piggy bank Savings account Lend to a reputable company: Google Lend to a local business: doctor s office Buy stocks Startup 6 3

4 Evaluating Our List of Potential Investments Piggy bank - Risk: close to zero - Return: zero - $100 -> $100 after a year Savings account - Risk: zero - Return: 0.25% interest - $100 -> $ after a year Lend to Google - Risk: low, but not zero - Return: 5% - $100 -> $105 after a year Lend to a doctor s office - Risk: Moderate - Return: 8% - $100 -> $108 after a year Buy stocks - Risk: moderately high - Return: 11.7% (S&P ) - $100 -> $ after a year Startup - Risk: very high - Return: potentially very high - $100 ->??? $1 million? 7 Evaluating Our Potential Investments Reward 11.7 Stocks Startup 8 Doctor 5 Google Savings Account Piggy Bank Risk 8 4

5 Summary Conversation Easier to predict risk or reward? Who should be risky and who should be safe? Given a level of risk, how do you pick between investments? Given a level of return, how do you pick between investments? 9 Outline: Stock Market What is a stock? How do you buy them? What is the stock market? How does a stock get listed? How is a stock s price determined? When should you buy or sell a stock? Some additional terminology Summary 10 5

6 What is a stock? 11 Stock Certificate 12 6

7 Stocks Represent Ownership Why do companies issue stocks? - Raise money to, for example: o Recoup investment o Further growth or expansion Why do people own stocks? - To make more money o Buy low sell high! 13 Apple Stock 14 7

8 Are There Other ways to Raise Money? Equity: - Stocks Debt: - Bonds - Loans 15 More About Stocks There are different types - Common o High return, voting rights o Last to get paid - Preferred o More like debt than equity o No voting rights o 2 nd to last to get paid o Receive a stream of dividends - Other types? o A great many: different classes (A, B, ). Generally about voting power. 16 8

9 17 Dividends Kind of like interest on the money invested in a stock - Larger more established companies pay stock owners a quarterly share of profits - Smaller growth oriented companies tend not to pay dividends How are they paid? - Cash Dividend - Stock Dividend: Sometimes paid in additional shares of stock 18 9

10 Apple Stock - Dividends 1.32% Dividend Yield 19 How do you buy a stock? Through a stock broker Stock brokers are members of an exchange - NASDAQ - NYSE Stocks are listed on the exchange - Initial Purchase Offering (IPO) - If they have: o $10 million in earnings over 3 years o $100 million in shares outstanding 20 10

11 How is a stock s price determined? Sense of the market - Demand Stock Price Supply # of outstanding Shares - Supply P Price = Market Valuation / # of shares Demand # of Shares 21 Simply Supply and Demand! Price Supply Stock Price Price = Market Valuation / # of shares Supply P P Demand Demand Quantity # of Shares 22 11

12 What happens to a stock with GOOD news? What happens to the number of shares? Stock Price P Supply What happens to the market s assessment of the value of the firm? - Market Valuation - Market Capitalization P Demand # of Shares 23 What happens to a stock with BAD news? What happens to the number of shares? Stock Price Supply What happens to the market s assessment of the value of the firm? P P Demand # of Shares 24 12

13 Example of Bad News Volkswagen: Cheated on an EPA test - Stock fell from about 170 to about 105 Bad news! 25 Apple Stock Bad News and Good News Suggestions of: - Demand declines - Inventory and supply issues Strong 3 rd Quarter Report 26 13

14 Stock Dividends often Called Stock Split Split: Generally doubles the # of shares outstanding - What happens to share prices? Can be any ratio - even a reduction in the number of shares outstanding 27 Stock Splits and Prices Stock Price Supply P P Demand # of Shares 28 14

15 What Happened When Apple Split: Apple: 7:1 Stock Split not an 80% decline 30 15

16 Reverse Stock Split Did it really more than double?.17 -> When to buy a Stock? Flippant: When you think the price will rise! When you have done your homework When it hits your buy price When stocks are on sale Too many statistics, but one is important: PE Ratio = Price/Earnings 32 16

17 When are stocks on sale? Follow the indexes: - Dow Jones - S&P Nasdaq Composite On Sale! Nasdaq Composite 33 What is the P/E Ratio? Why is it important? It tells the relationship between prices and earnings - Basically: the higher earnings are, the higher prices should be Market P/E Ratio: for S&P If the P/E ratio is high, simple expectation is for price to fall - If the P/E ratio is low, simple expectation is for price to rise What about Apple s P/E ratio? 34 17

18 Apple: P/E Ratio P/E ratio 35 What about: FAAMG? (Note: was FANG) F A A M G Company P/E Ratio Price Market Capitalization Facebook $465 Billion Tech Sector Giants - Combined Market Cap: $3.8 Trillion - Greater than the GDP of Germany - Together occupy the top 5 spots in the market Apple $1.06 Trillion Amazon ,928 $940 Billion Microsoft $863 Billion Google ,171 $813 Billion Which do you buy? Which do you sell? 36 18

19 Amazon looks like a good sell by P/E ratio Still want to sell? 37 Summary of When to Buy and Sell Do your research! Know that it is very difficult to pick winners! Know that things can change in a hurry! 38 19

20 Additional Terms Short selling OPM Other People s Money Indexed funds Bear market Bull market 39 NASDAQ: Bull or Bear? Bear Bull Bull 40 20

21 Stock Market Summary Basically an investment in: - The economy - A small part of the economy Great way to generate wealth Great way to reduce your wealth Rewards specialized knowledge Filled with conflicts of interest 41 Investment Choices How do you rank these 3 investments: - Apple stock - Uber IPO - Apartment building In terms of risk (low to high)? 1. Apple stock 2. Apartment building 3. Uber IPO In terms of reward (high to low)? 1. Uber IPO 2. Apartment building 3. Apple stock 42 21

22 What Investment Should you make: If you are a 30 year old in the tech sector - Uber IPO or Apartment building If you are 60 years old - Apple stock - Better still, something less risky: o Buy a market indexed fund o Treasury bonds 43 Concept: Expected Return on Investment Combination of risk and reward: Return on investment = risk * reward - Risk =.5 (50%) - Reward = 10% Return on investment =.5 * 10% = 5% 44 22

23 Back to Our Original Investment Options Investment Reward Risk Expected ROI Piggy Bank Savings Account 0.25% 0% 0.25 Google 5% 10% 4.5% Doctor 8% 25% 6% Stocks 12% 33% 8% Startup 100% 90% 10% 45 Many Factors Affect Risk When does the 30 year old buy: - Savings account - Google - Startup 46 23

24 Summary Investing can be, but need not be complicated. - Getting the most from your money is HARD! - Getting a reasonable return is not. Have to balance risk and reward. - Risk is often very difficult to assess. Get a ton of information before investing. - Important for evaluating potential risk. - And often reward. Approach investing with great care. - Your situation matters as much as the market. 47 Remember This -45% -51% Nasdaq Composite 48 24

25 And This: -18% 49 Thank you! Any Questions? Jon Haveman, Ph.D. Contact NEED: 50 25